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Giant market analysis moody's says El Salvador's credit rating may suffer due to its adoption of Bitcoin.
El Salvador is facing a decline in its credit rating on its present trajectory.
In his conversation with Bloomberg, Jaime Reusche, an analyst at Moody’s, expressed this sentiment, saying the country’s indulgence of Bitcoin “certainly adds to the risk portfolio,” citing the Latin American country’s struggle with liquidity in the past.
President nayib bukele's administration has seen the country adopt bitcoin as legal tender alongside the american dollar, launch of the government-managed chivo portfolio that integrates lightning network technology to support payments using digital assets in the country. Within the period, President Bukele has created a Bitcoin reserve for the country, famously adding to the country’s holdings by buying every dip. At present, the country has more than 1,391 btc on reserve.
Reusche, however, warned that purchasing more Bitcoin would substantially increase the company's risk of default on its debts. The analyst said, “If it gets much higher, then that represents an even greater risk to repayment capacity and the fiscal profile of the issuer.”
Excluding credit rating concerns, moody's also said the country's bitcoin bond, who is supposed to finance the building of his bitcoin city, may impede its entry into international bond markets.
With the possibility of a weaker credit rating and the country's greater possibility of default on loans, the country is likely to struggle to obtain access to international loans. Such a result risks being problematic for a developing country such as El Salvador.
It is unlikely that the bukele administration will be biased by the analysis of moody's as it is not the first time that the country's bitcoin policy has attracted the skepticism of financial experts. Bukele, in a strongly worded tweet targeting detractors, expressed his strong belief that the policy would improve the country's economy and kick-start a global revolution.
Maximalism and scepticism.
The manner of Bitcoin's adoption by the Government of El Salvador as well as President Bukele's humorous antics raised a few eyebrows.
A Bloomberg report raised questions about President Bukele’s methods of trading Bitcoin for the entire country through his mobile phone. President Bukele responded to the report by adding that he did "nude" which did not do much to build confidence among financial bodies.
It will be noted that companies have no alternative but to accept Bitcoin as a means of payment for goods and services. This move has been criticized as toxic Bitcoin maximalism and against the fundamental ethos of blockchain technology by Ethereum founder, Vitalik Buterin and other commentators.
The IMF has sent several warnings over the country’s stance, saying, “Given bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability.”
